Southwestern Energy Company (SWN), Chesapeake Energy Corporation (CHK), EQT Corporation (EQT): The Most Popular Natural Gas Play in America

Page 1 of 2

Despite low gas prices over much of last year, the Marcellus shale — a vast formation that extends from southern New York to West Virginia and spans most of Pennsylvania, the eastern part of Ohio, and parts of Maryland, Virginia, and Tennessee — was one of the only gassy plays in the country that didn’t see a sharp drop-off in drilling activity.

And more recently, the play has generated a great deal of interest, with a handful of transactions occurring over just the past few months. For instance, Southwestern Energy Company (NYSE:SWN) more than doubled its net acreage in the play, taking advantage of distressed seller Chesapeake Energy Corporation (NYSE:CHK)‘s need to divest non-core assets to raise much-needed cash.

Shortly thereafter, Chesapeake Energy Corporation (NYSE:CHK) offloaded another asset package, this time to Pittsburgh-based EQT Corporation (NYSE:EQT). The $113 million transaction was for 99,000 net acres in southwestern Pennsylvania and 10 horizontal Marcellus wells in Washington County, Pa.

Natural gas prices — though they’ve risen appreciably over the past couple of months — are still very low by historical standards. So what’s the reason behind the recent flurry of acquisition activity in the play?

Low costs of production
The Marcellus’ popularity is due largely to its superior economics: It boasts some of the lowest all-in production costs of any U.S. shale gas play, as well as a relatively high proportion of natural gas liquids relative to other gassy plays.

According to Bentek Energy, an energy market analytics provider, the Marcellus can deliver a sufficient internal rate of return, or IRR, of about 20% with a gas price of roughly $4 per MMBtu. By comparison, other natural gas-supported plays such as the Haynesville, Fayetteville, and Barnett shales require a gas price of around $5 per MMBtu to deliver the same IRR.

Ideal location
Another major reason the play is so popular is its ideal location. The Northeast hosts some of the largest gas-consuming cities in the country, including New York City, Boston, and Philadelphia, giving Marcellus producers a convenient outlet for their production. Jeff Ventura, CEO of Range Resources Corp. (NYSE:RRC), one of the most active drillers in the play, explained:

“Gas from the Marcellus will not only supply in Northeast United Sates, but gas from the Marcellus will move into the Midwest and Southeast markets. It’s also strategically located relative to existing pipeline infrastructure as well as the export facilities in harbor in the Philadelphia area.”

Page 1 of 2